Back in the 1960s and 1970s, a few major companies took out oil exploration concessions there from the government of South Africa. In 1974, Shell (NYSE: RDS.A / RDS.B) discovered a gas field off the southwest coast with the Kudu project. Early estimates were 1 trillion cubic feet of reserves, but current estimates range up to 10 trillion. Kudu was big, but nobody much cared about natural gas back then. Gas was too cheap, and southern Africa was too far away.

There was hardly any development around Kudu for the next 20 years. South Africa was under international sanctions due to its apartheid regime, so oil companies and other outside investment stayed away. Almost nothing happened with energy development until Namibia became independent in 1990.

By the early 1990s, the gas field at Kudu intrigued foreign oil companies. Kudu showed a large hydrocarbon resource. Clearly, there was significant potential. But nobody really understood the offshore geology. Plus, back then, it was tough to drill in water more than about 1,500 feet deep. Namibia didn’t make for an investment magnet.

But with the recent success of offshore Brazil, the energy exploration expectations of the world have been fundamentally altered. The same brilliant researchers and scientists that discovered the potential of Brazil’s Tupi field are now doing extensive research in offshore West Africa, in particular offshore Namibia. One researcher I’ve been following very closely believes the offshore areas of Namibia are ‘geologic analogues’ to Brazil.

Source: The Next Great Oil Frontier

Even a first grader can look at this market and know anything but fundamentals are driving the action. Fortunately for guys like me, few grade-school can figure out why.

These days, it is all about the macro-economy. More specifically, the only thing anybody cares about is the value of the dollar. When the greenback is up, the market is down (like today). When the dollar is weak, the market rallies – like last week.

There are several reasons for the trend: flight to safety, inflation, political risk… you name it.

What matters for us as traders is the pattern is unwaveringly true for the crude markets. With oil settlement denominated in dollars, the ever-important energy source is tied directly to the greenback.

The correlation makes oil a great hedge against the dollar, even better than the politically critical gold markets (few entities can dump billions of dollars of oil reserves into the market like the IMF may do).

Unfortunately, today’s strength in the dollar has sent crude prices back below the critical $70 level. As I write, a barrel is trading at $69.14, down $2.90 on the day.

That is not good news for industry giants like Exxon Mobil (NYSE:XOM), BP (NYSE:BP) and Chevron (NYSE:CVX), which all gapped down at the day’s opening bell.

Could be worse

While a small drop in Big Oil valuations erases billions in paper wealth, their shareholders are not feeling nearly the level of pain as the folks unlucky enough to be long on Delta Petroleum (NYSE:DPTR).

The stock is down 43% on news its Columbia River Basin test well performed far below expectations. While some gas was pumped, the company has deemed the level s “uneconomic.”

While the action has little to do with the value of the dollar or even commodity prices, the nasty decline goes a long way in showing the increasing levels of volatility in the nation’s energy industry.

As political, currency and economic risk swirl into a virtual perfect storm fueled by speculation, we are going to see larger and larger swings in the oil and natural gas industry. For some investors, it is exactly what they were hoping for. But for others, it will be a costly trap.

The folks with the most to win are options traders. Over at TFN Strategic Trader, we have used the increased volatility to our great advantage. Last Thursday, we locked in gains of 40% on a set of Chesapeake Energy call options.

Even better, the portfolio currently boasts a Big Oil short position and a dandy covered call already worth double-digit gains. Increased volatility will be a boon for options traders.

But for speculative investors looking to play the global economic rebound by grabbing shares of small-cap producers on the cheap, I have just three words… do your homework. If the dollar gets much weaker, the industry is going to start looking very different.

I am a huge fan of the commodities market, especially with China on a buying spree, but oil industry investors have a few more risk factors to handle.

Fail to understand how they all work together and you could have serious trouble on your hands. But get it right and make the smart moves, well, the rest of this year is going to treat you very well.

Keep your eye on that dollar.

Source: Oil Investors: Keep Your Eye on That Dollar

As the standout index (based on a percentage retracement off the March lows), the Nasdaq 100 is the most important one to focus on here. The weekly chart below reveals that it’s clawed back around 50% of its losses since late 2007.

Correction Coming

The late 2007 sell-off and subsequent rally looks like a classic 5-wave Elliott Wave Theory move, with the current rally perhaps being the fourth wave of a 5-wave downside move.

If that’s the case, the Nasdaq 100 shouldn’t close much above the trendline before the fifth wave to the downside begins. At this point, with all the indexes still bullish and under buy signals, we’ll have to wait and see how the Nasdaq 100 is acting if it gets close to the trendline, which is currently around the 1,710 area.

In any event, all the indexes are getting overbought and once the rally runs out of steam, which could happen this week, we should see a correction at least. And the way the correction unfolds will give us a better idea of what to expect over the next few months.

So with that in mind, we’ll focus on a relatively weak sector this week that could be shorted once the rally runs out of steam…

Oil Index Back Above Its 50-Week Moving Average… And Could Test The Top Of Its 10-Month Trading Range

If the stock indexes do succumb to the overbought conditions and reverse course sharply, we’ll probably hear that the recession may linger longer than expected.

If that’s the case, crude oil inventories will probably continue to rise, due to lack of demand. That would put pressure on the oil stocks. Take a look at the weekly chart of the AMEX Oil Index(AMEX: ^XOI).

Having topped out in May 2008, the index went on to give up about 55% of its value just four months later. Since reaching its lows in September, it’s climbed, but has underperformed the stock indexes, as it worked off the oversold conditions. You’ll notice that the latest move up has been unable to get above its January highs while the other stock indices continue to make new new recovery highs.

How To Play Oil’s Next Downside Move

While the stock indexes made new recovery highs in early June and then again last week, ^XOI was unable to follow suit. The chart looks to be in a bearish consolidation pattern and if that’s the case, a test or break of the lows is likely once the current rally runs its course.

The top of the consolidation pattern is around the 1,055 area and selling calls or buying puts would be a low-risk trade if it manages to get back up in that vicinity. However, if the stock indexes turn lower before that occurs, barring unforeseen problems in the oil market, it will probably continue to move lower.

In that case, the first support level is in the 845 area and then at 750, which is at the bottom of the consolidation pattern. A close below 750 would probably take it down to its next support level in the 650 area.

The two weakest-looking stocks within the $XOI are Valero Energy (NYSE: VLO) and Hess Corp (NYSE: HES).

Jim Stanton

Source: Oil Stocks Under Pressure…How to Play the Move

U.S. crude for August was up 58 cents at $68.08, by 1212 GMT, off an earlier low of $66.37. U.S. crude for July delivery expired on Monday, settling down $2.62 at $66.93 a barrel.

London Brent crude rose 48 cents to $67.46.

The dollar fell more than 0.5 percent against a basket of currencies on Tuesday. A lower dollar can strengthen commodities denominated in the currency.

The market awaited U.S. weekly inventory data from the American Petroleum Institute due later on Tuesday and U.S. government oil stocks figures on Wednesday for clues on the demand outlook for the world’s top energy consumer.

A Reuters poll of analysts ahead of the government inventory data forecast crude stocks fell by 1.3 million barrels last week on lower imports, while gasoline stocks and distillates, including heating oil and diesel fuel, were seen rising.

The API will release its weekly stockpile data at 2030 GMT, while the U.S. Energy Information Administration will release its report on Wednesday at 1430 GMT.

Spot gold stood at $923.40 per ounce by 1132 GMT, having earlier hit a six-week low at $912.90 in Asian trade. That compared with $921.90 quoted late in New York on Monday.

Traders said that bullion prices, having hit three-month highs recently just shy of $1,000 an ounce, were ripe for the falls seen over the past few days with speculators looking to clear out stale long positions.

But the metal’s traditional role as a hedge against jittery sentiment in other asset classes was also kicking in as investors, spooked by doubts about growth prospects for leading economies, shift into risk-averse gear.

Concerns about reserve diversification away from U.S. assets caused the dollar to turn lower against the euro ahead of the Federal Reserve’s monthly meeting, after Moody’s said one risk to the U.S.’ triple-A rating is if the dollar is challenged as the main reserve currency.

“Gold is tracking the dollar closely today, but we’ll have to wait for the FOMC statement tomorrow night for the market to choose to move clearly in one direction or another,” said David Thurtell, analyst at Citigroup.

A weaker dollar makes metals and other commodities priced in the U.S. unit cheaper for non-U.S. investors.

Crude oil prices rallied to $68 a barrel on Tuesday ahead of data expected to show a fall in U.S. oil stocks, reversing losses and renewing the appeal of gold as a potential inflation hedge.

“The key driver here is basically crude oil, the dollar and inflation expectations, and I think gold at the moment is pricing in a huge amount of inflation expectations,” said Jesper Dannesboe, an analyst at Societe Generale.

INVESTOR CAUTION

U.S. gold futures for August delivery rose nearly half a percent to $924.80 per ounce on Monday on the COMEX division of the New York Mercantile Exchange.

Overall investor caution was stirred by the World Bank on Monday, which said prospects for the global economy remained “unusually uncertain” as it cut 2009 growth forecasts for most economies.

“Investor risk appetite has lost forward momentum as the market begins to question the extent to which the green shoots of the financial risk rally have roots in the real economy,” Tullet Prebon said in a note to clients.

“There is nothing like a 3.1 percent drop in the S&P on a day to get the bears out of the woods…, but the joke aside it is beginning to look like those who hoped for a V-shaped recovery will find that we are looking at the tail end of it.”

The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust , said its holdings fell to 1,131.24 tonnes as of June 22, down 0.91 tonnes from the previous business day.

It was the first change in the holdings since June 5. The holdings hit a record 1,134.03 tonnes earlier in the month.

In other metals, silver firmed slightly to $13.83 , up from $13.72 quoted late in New York on Monday. Platinumrose slightly to $1,167.50 from $1,159.50, while palladium firmed to $234.50 from $232.00.

LONDON, June 23 (Reuters)

It is not every day we see a $10 billion company like Valero Energy (NYSE:VLO) shed 20% of its value. When it happens, it is certainly action worth investigating.

The sudden decline comes thanks to the company’s executives estimating a fifty-cent per share Q2 loss, versus $0.59 per share earlier estimates and $0.74 per share consensus projections. The jaw-dropping news sent shares of competing refiners into the dumpster as well.

Frontier Oil (NYSE:FTO) is down over 15%. CVR Energy (NYSE:CVI) is down over 17%. And Suncor (NYSE:SU) is down by 8%.

The more a company’s profits rely on refining revenues, the deeper the decline.

The day’s action has created opportunities for options investors.

Sure, things are bad at Valero, at least in the short run. But its competitors do not face such a bleak outlook.

The market makes mistakes

Valero claims its Q2 loss will be due, in part, to its temporary shutdown at its Delaware City facility as well as unfavorable margins, especially in the diesel market. There is no doubt volatile crude prices over the last six months have made managing the business extremely difficult. Margins have been anything but predictable.

Refiners must walk a thin line to reach maximum profitability. Much of their fate relies in the hands of energy traders. Creating and sustaining maximum margins takes incredible financial diligence and hedging. Get one calculation wrong and, well, just look at Valero.

But as I said, Valero’s problems are not systemic. The industry as a whole should not have dropped by such large levels today.

For options investors, it spells an opportunity to buy short-term calls. Front-month calls carry the most reward, but are the most risky.

CVR Energy’s June 7.50 calls are worth looking at. And Suncor’s June 33.00 calls are worth your time.

The best profits will come if the markets make a significant rebound off of today’s depressing action. Even if the next several weeks offer moderately bullish action, the profit potential is eye-opening.

Big, industry-wide moves like we saw today are what options investors depend on for triple-digit gains. The market does not make such big mistakes often, but when it does the profits can be spectacular.

Source: Take Advantage from the Refining Industry Fallout

As for likening agriculture today to oil in 2001-2002, an investor’s pulse quickens. We all know the great run oil stocks had as the price of oil sprinted from under $30 to a peak of $143 per barrel. Investors made hundreds-of-percent gains – even thousands-of-percent gains. What most investors forget is that oil prices halved from 2000 to the bottom in 2001, just before the great run-up. The same sort of setup seems to be happening today in the agriculture sector. Most ag commodities fell more than 50% after hitting their June 2008 highs.

This is the pause that refreshes.

The biggest reason to get excited about agriculture is the fact that supplies are at multi-decade lows. In fact, as McLornan points out, “agriculture is one of the very few sectors globally that currently face supply shortages.”

The “stocks-to-use ratio” provides a helpful context. This ratio measures how much supply is on hand versus how much we use. High ratios imply a fully supplied market. Low ratios hint at possible shortages. You have to go back to the 1970s to find ratios in wheat and corn as low as they are today.

The kicker to all this is that last year, the world’s farmers produced a record wheat crop and the stocks-to-use ratio barely budged. There is no way we are going to top that harvest this year with all the drought hitting different parts of the world.

The International Grains Council (IGC) predicts a fall in total wheat output in 2009-10. The IGC predicts global wheat output of 650 million tons, down by 5% from the previous year. The largest declines are seen in the European Union, the U.S., China, Russia, and Ukraine. “Although conditions in the Northern Hemisphere are generally favorable,” the IGC says, “production is likely to fall sharply.”

McLornan says that global yields for wheat hit a plateau in the 1980s and “gene modification technology has been unable to improve what natural selection has achieved over the past centuries.” So we already have tight supplies. And they look to get tighter.

The financial crisis also threatens to reduce supplies. Farmers who cannot gain access to credit cannot put seeds in the ground. Thus, the twin forces of drought and financial crisis seem likely to exert a growing influence over the grain markets – depressing supplies and therefore, boosting prices.

We’ve seen this movie before…

In 1933, in the pit of the Great Depression, writer Sherwood Anderson took to America’s back roads to see how the country was making out. He wandered into coal towns and mill towns, farms and factories.

His account, published in 1935 as Puzzled America, gives us a peek at Depression-era days. As the title lets on, most Americans seemed not to know quite what to make of the Great Depression. “Puzzled” seems just the right word.

It was puzzling because a man was prosperous and then suddenly was not any longer. A common story in farm country during the Great Depression began something like this: There was a prosperous farmer with lots of land who grew wheat. He then went into debt to buy more land and plant more wheat. The price of wheat suddenly fell like a shot quail. And the farm went under. Just like that, our man was broke.

If the financial crisis didn’t take the farm, Mother Nature did. “It was a farm until he plowed it,” Anderson quotes one man as saying of his uncle’s place. Then the drought came. The dry soil swirled around like snow in a blizzard. The farm simply “blew away.”

The hot winds tore the bark right off the trees and burned crops to ash. Fences lay buried under dust drifts. Dust storms blackened the sky. Topsoil of thousands of acres blew away. Anderson describes a little church in North Dakota:

The boards of the church cracking and curling under the dry heat, the paint on the boards frying in the hot winds… and the dust of the fields sifting in through the cracks. Dust in the mouths of the people as they prayed for rain.

Commodity prices took a big tumble after the crash of 1929. That’s what bankrupted the once-prosperous farmers. Then you had fewer farmers farming. Then you also had drought. Supply fell and prices soon rallied hard off their bottoms. By 1937, most food commodities – corn, wheat, sugar – were as high, or higher, than their ‘29 highs.

Today, we also have the dual threat of drought and financial crisis. Farmers across the southern plains report poor crop conditions, thanks to dry weather. We also have drought in many places in the world that usually grow a lot of food.

One example: China’s Ministry of Agriculture said that a third of its crop faces drought issues. The country’s stocks-to-use ratio will fall below 30% for the first time since 1971. As AgCapita, an investment fund specializing in farmland, notes in a recent letter, China will be a net importer of 12 million metric tons of wheat. By way of comparison, Canada’s entire annual wheat exports average around 15 million metric tons.

We also have cutbacks in supply, as farmers have a harder time getting financing to buy seed, fertilizer and machinery. As The Wall Street Journal reported recently:

Across the nation, farmers are making plans to cut their production of corn, wheat, rice, peanuts, beef, pork, poultry and milk… Also, some farmers plan to grow just one crop on land that normally produces two each year, and to let some land lie fallow throughout the year.

Production of meat in every category will fall for the first time since 1973. Meanwhile, consumption of grains keeps rising. Globally, wheat demand should rise 6% this year. No surprise that retail food prices rose nearly 6% last year. I think they could rise as much this year.

Ultimately, we’ll have to grow more food…somehow. So a forward-looking investor will want to invest in the ideas that help that process along. Fertilizers are one such idea. Like a prizefighter with a tough chin, fertilizer demand doesn’t stay down for long. The reasons are simple. Lower fertilizer use means lower crop yields. Lower crop yields tend to raise prices for food. These higher prices then provide an incentive to plant more, so fertilizer demand comes back.

I’m a fan of PotashCorp (POT:NYSE), which benefits from these trends. It also owns more potash, a key fertilizer, than anybody else. As Barron’s recently noted: “Longer-term investors can take comfort in the knowledge that many crop-planting, potash-guzzling countries – like China, India, Brazil – all have growing economies.” And they have growing populations as well.

There are other ways to invest too. You can buy other ag-related businesses. You can also invest in the actual food commodities. I expect good moves on this stuff in the back half of the year after the fall harvest disappoints.

What about demand?

I think we’re getting close to the moment when the world’s meager supplies of grains become front-page news. We have another few months before the reality of a lousy fall harvest sets in. Agriculture investments should do very well from that point – for everything from fertilizer stocks to agricultural equipment makers to the grains themselves.

As always, I recommend buying assets like these before the crowd sees it on the 6:00 news.

Source: The Best Investment Opportunity of 2009

Table of Contents:

• Oil Production: Why OPEC’s Keeping a Lid on Production
• Oil Prices: Why Crude Thrives on the Diving Dollar
• Oil Outlook: The Coming Oil Price Shock
• Investing in Oil: The Best Companies, Stocks and ETFs

Oil has staged an impressive rally since dropping below $35 a barrel in mid-February.
And while there remains a risk that prices will retreat further due to sluggish demand, there are also three very compelling reasons why oil is still a safe long-term bet:

• OPEC has made substantial progress in reducing the amount of oil on the market.
• The dollar has been made vulnerable by the U.S. Federal Reserve’s aggressive policy of quantitative easing.
• And low oil prices and tight credit have reduced global energy investment, putting future supply at risk.

There’s no question that downside risk remains. On April 13, the Paris-based International Energy Agency (IEA) lowered its demand forecast by 1 million barrels a day, and now expects the world will use about 83.4 million barrels per day in 2009. That would be 2.4 million barrels a day, or 2.8% less than last year.

But so far dwindling demand has failed to contain oil prices.

As Money Morning predicted in its annual outlook series, the first quarter was a volatile one, in which oil prices tested the low $30s before surging over $50 in recent market rally.

And analysts are almost completely united in the view that, despite its short-term volatility, declines in production, exploration and development, and the value of the dollar will drive oil prices substantially higher in the years ahead.

Oil Production: Why OPEC’s Keeping a Lid on Production

The members of OPEC generated tremendous revenue from oil prices that soared over $147 a barrel last year. However, just as the world’s top oil producers began looking for ways to spend their massive stockpiles of cash, prices began a plunge that would see crude lose more than three-quarters of its value.

In a desperate effort to put a floor under oil prices, OPEC – supplier of 40% of the world’s oil – has issued three production cuts totaling 4.2 million barrels per day (bpd), or nearly 12% of its capacity, since September.

While the cuts have not yet been able to return oil prices to the group’s desired price range of $60-$70 a barrel, the cartel abstained from making any further reductions at its latest meeting in March and even voiced optimism that crude would reach $60 a barrel by the end of the year.

“That suggests to us that not only does OPEC have the firepower to support this oil price, but there’s enough internal agreement between OPEC members that they can actually achieve it,” Tom Nelson, an analyst for the Guinness Atkinson Global Energy Fund told BusinessWeek.

Many analysts had speculated that OPEC members would ignore the quotas and continue to produce oil to generate income, thereby rendering the cuts ineffective. But OPEC’s discipline has proven many critics wrong.

Despite foot-dragging from Iran and Venezuela – two countries that rely heavily on oil revenue to fund massive social programs – OPEC has gotten about 80% compliance on the 4.2 million bpd production cut. Historically, the cartel only gets about 60% compliance on such cuts.

As of February, Saudi Arabia accounted for about 46% of the 3.4 million bpd decline in production, according to PFC Energy. And the United Arab Emirates have fully complied with their share of the cuts. Iran’s compliance by that time was only 33% and Venezuela had only adhered to half of its commitments.

Still, Abdallah El Badri, OPEC’s Secretary General, estimates the production cuts will take about 800,000 bpd of supply off the market, significantly reducing the overhang in global markets, BusinessWeek reported.

OPEC officials from Libya, Algeria, and Iraq have all said that oil prices will reach $60 a barrel by the end of the year.

“One of the reasons why OPEC felt able to roll over quotas was that they do appear to have set a floor for prices,” Mike Wittner, an analyst at Societe Generale SA (ADR: SCGLY), told Reuters. “According to a lot of the balances, including ours, if you have OPEC holding steady or cutting a bit more, you get a big, counter-seasonal stock draw in the third quarter.”

Oil Prices: Why Crude Thrives on the Diving Dollar

Crude futures doubled from July 2007 to July 2008, soaring from about $74 a barrel to a record-high $147 a barrel. Much of that rise can be attributed to supply and demand, but there was another catalyst for the soaring prices that few investors recognized: The rapid decline of the dollar.

From July 2007 to July 2008 the dollar plunged 16% against the euro. And as the dollar became less valuable the cost of commodities around the world skyrocketed.

At the time, inflation – not deflation – was the predominant concern among the world’s leading economists, as a decade of low interest rates and unconstrained lending in the United States sucked the life out of the dollar. And while inflation is nowhere near the levels it reached last year, it’s important to recognize that the policies of the U.S. Federal Reserve are no less inflationary.

The Fed has cut its benchmark lending rate to a range of 0%-0.25%, and soon after, Fed Chairman Ben S. Bernanke said the central bank would purchase up to $300 billion of longer-term Treasury securities and $750 billion of mortgage-backed securities as it pursues a policy of quantitative easing.

This announcement by the Fed, along with a corresponding rise in equities, has been the driving force behind oil’s recent rally.

Ultimately, the same fear of inflation that typically drives investors into the gold market is similarly buoying oil prices. And even though the dollar has yet to be seriously affected, there’s no ignoring the fact that the more than $1 trillion worth of government bonds and mortgage-backed securities injected into the market will imperil the dollar’s value.

Oil Outlook: The Coming Oil Price Shock

Now that a weak dollar and reduced production have bolstered oil prices, there is a growing concern about how much higher crude will climb once demand returns. Tighter lending conditions and a trough in oil prices have badly crimped investment and jeopardized future supplies.

More expensive energy projects such as oil sands have been put on hold and the number of drilling rigs at marginal shallow-water fields around the world has been scaled back to a three-year low.

Oil drilling activity dropped 43% in the 12 months through March, with year-over-year oil exploration in the United States alone down 38%. High bids for offshore drilling rights in the central Gulf of Mexico fell by more than 80% compared with last year.

OPEC has said that with oil generating substantially less revenue as many as 35 new projects could be delayed past 2013.

“I have often described unsustainably low oil prices as carrying the seeds of future spikes and volatility. In a low-price environment, the trend is often to focus on survival instead of expansion,” said Ali al-Naimi, the Saudi oil minister. “If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.”

The current economic crisis could reduce future oil supply growth by 8 million bpd, according to a recent study by the Cambridge Energy Research Associates (CERA).

CERA now says that production will grow by just 7.5 million bpd over the next five years, down from the 14.5 million bpd increase it predicted last summer. According to the research group, as demand recovers throughout that span, production will struggle to keep up and a new commodities bull market, similar to the one seen in 2008 will begin.

“Seven consecutive years of rising oil prices – unprecedented in the history of the oil industry – have come crashing down, thus burying the notion that the commodity price cycle was a historical relic,” said the report.

CERA isn’t the only organization worried about the lack of investment in new oil projects, either. The International Energy Agency (IEA) – energy advisor to 28 industrialized nations – has also issued warnings about a coming supply crunch.

The IEA estimates daily oil demand will rise from the current level of 86 million barrels to 106 million barrels by 2030. To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.  About 7 million bpd of additional capacity needs to be added to the market by 2015.

“Unless sufficient companies have the will and financial ability to invest through the down cycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases – possibly as early as this year,” Richard Jones, the IEA’s executive director said at a recent conference in London.

Jones estimates that as much as 2 million bpd of expected new oil production has already been deferred.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”
The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“Every bull market in oil is really born in the zenith of a bear market,” said Phil Flynn, an analyst at Alaron Trading Corp. “The cutbacks we see today are going to lead to a spike somewhere in the future. The big question is when it’s going to happen.”

Investing in Oil: The Best Companies, Stocks and ETFs

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

”Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Money Morning Contributing Editor Horacio Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ’spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”USO

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Keith Fitz-Gerald, Money Morning’s Investment Director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP (UGA).

Source: Three Big Reasons Oil Prices Will Rally Back Big Time

U.S. light crude hit $54.66 a barrel, its highest price since Nov. 28, before easing to $53.60 by 1708 GMT. But it was still up by 87 cents, recovering from a decline of more than a dollar on Wednesday.

London Brent crude rose $1.18 to $52.93.

Oil derived some support from a rally in Asian shares, which rose to their highest in 11 weeks following upbeat U.S. economic data on Wednesday, although European shares fared lower.

Oil prices responded little to a set of gloomy U.S. government data, which showed the U.S GDP fell 6.3 percent, the steepest decline since 1983.

Recovering equities this week as well as a generally weaker U.S. dollar have helped to underpin oil but the rise could be short-lived because of weak fundamentals, analysts said.

“Oil stocks are still very high and if you look at the investment flows, volumes have been very light,” said Olivier Jakob of Petromatrix.

A weaker dollar makes commodities priced in the U.S. unit relatively cheap for holders of other currencies, which can attract investors.

Oil has fallen from highs above $150 last July as the global economic crisis dented energy demand but it has recovered from lows below $35 touched in December partly as a result of export curbs by the Organization of the Petroleum Exporting Countries.

There are signs prices are at least stabilising. A Reuters poll on Wednesday showed a consensus view of analysts that oil prices would average around $50 this year.

“We are seeing some optimism, we are seeing some return of risk appetite, both of which we have not seen for a while…” Mike Wittner, Societe Generale’s global head of oil Research, said. But he too pointed to the high inventories.

On Wednesday, U.S. government data showed an increase in crude oil stocks to their highest levels since 1993. The data also showed falling demand.

Source: March 26 (Reuters)

This from Today’s Financial News:

Even with the threat of a strike, crude prices managed to dip below the crucial $40 level, the unofficial delineator between cheap and moderately priced oil. What will happen through the rest of the week is up to the United Steelworkers.

If the union, which represents some 30,000 employees and about 70% of the nation’s refinery production, votes against the proposed contract, volatility is bound to rise. If a contracted is ratified over the next day or so, then volatility and prices are likely to drop even further.

The union and the nation’s oil companies are working on a day-by-day basis, but insiders say they are getting close to a compromise. In fact, some say it looks like a strike may even be unlikely. But unions have surprised us before and will certainly do it again.

Destroying what’s left

What makes a worker want to go on strike in this economic downturn, especially after they were promised a raise, remains out of my grasp. But then again, what makes unions tick in the first place has always been a mystery to me. They drove large manufacturers out of my hometown, took Detroit to its knees and now they are threatening to tear at the throat of the nation’s last great blue-collar profit maker.

If these workers get the guts to strike, as an investor, you have a few options. You can pick a major oil refiner, like Valero (NYSE:VLO), the nation’s largest, and short it. After all, even a short-term strike will pull down its quarterly profits.

Another option is to play the broader refining industry through an ETF like United States Gasoline Fund (NYSE:UGA). As production falls, gasoline prices will rise.

Finally, you can play the broader energy market through a fund like the Ultra Oil and Gas ProShares (NYSE:DIG). If shares go up, its price will jump at a two-to-one ratio, at least on a day-to-day basis. Be careful with these ETFs as they are calculated on a single day, not a long-term trend. With the right level of volatility, these shares can actually drop in value even as prices rise over the long-term.  They do it quite often.

But do not be certain crude prices will rise because of a refinery-level strike. Chances are, it could be just the opposite. We already have too much oil on the market. If refineries shut down, the supply glut will be even worse. In that case, take the Ultrashort Oil and Gas ProShares (NYSE:DIG).

No matter which slant you take or which way you choose to invest, one thing is certain. The nation’s largest companies are once again out of the predictable hands of a free market. They have been seized by unions and greedy politicians.

It makes the job of an investor even harder, but the profit opportunity is there just the same.

Source: Playing a potential refinery strike